Question

question 18

what is a drawback of operating a business as a sole proprietorship (also known as a dba or \doing business as\)?

• high start-up costs
• shared profits
• unlimited personal liability
• double taxation

Explanation:

Define sole proprietorship characteristics

Using the Types of Business Ownership knowledge point, a sole proprietorship is an unincorporated business owned and run by one individual. It is the simplest and cheapest business structure to establish, meaning it has low start-up costs and the owner does not share profits with anyone else.

Analyze the primary drawback

Using the Unlimited Liability knowledge point, because there is no legal distinction between the owner and the business entity, the owner is personally responsible for all business debts, losses, and legal liabilities. This means personal assets (like a home or savings) can be seized to pay business debts.

Evaluate the given options

• High start-up costs: Incorrect. Sole proprietorships generally have very low start-up costs.
• Shared profits: Incorrect. The sole owner retains all profits.
• Unlimited personal liability: Correct. This is the primary risk and drawback of this business structure.
• Double taxation: Incorrect. This is a drawback of C-corporations, whereas sole proprietorships use pass-through taxation.

Answer:

• (A) High start-up costs
• (B) Shared profits
• (C) Unlimited personal liability (Correct answer)
• (D) Double taxation